MUTUAL FUNDS REPORT

MUTUAL FUNDS REPORT; Housecleaning at Ailing Funds Is Light, So Far

By PATRICK McGEEHAN

Published: January 6, 2002

AFTER two years of shabby performance for America's growth-stock funds, the housecleaning has begun.

Some managers with subpar records have been swept out, and some of the worst-performing funds have been shut down or merged into better ones. But the widespread disappointment among investors in hundreds of sagging growth funds has spurred far less change than fund analysts had anticipated.

''If it turns out that this is all there is, I would be shocked,'' said Russel Kinnel, director of fund analysis at Morningstar Inc. in Chicago.

More managers were shown the door in 2001 than in most years, he added, ''but it hasn't been tremendous.''

The losses suffered by growth funds certainly have been. In 2001, growth funds -- those that concentrate on buying stocks of large companies expected to grow fast -- lost 23.56 percent of their value, on average, according to Morningstar. That came after a loss of 14.5 percent in 2000.

''There's a paucity of strong managers,'' said Burton Greenwald, a mutual fund consultant and independent fund director in Philadelphia. ''The bull market carried a lot of average, or perhaps mediocre, fund managers to heights that did not reflect their abilities.''

Many growth funds soared during the technology stock boom of the late 1990's, so investors who sold them two years ago should have racked up big gains. But those who held on may be finding that all of their paper gains have been wiped out and that their investments are now worth less than when they made them -- even after the stock market's rebound gave most growth funds a boost toward the end of 2001.

The fallout from the growth-fund plunge varies greatly from one company to another. At the money management unit of Merrill Lynch, the two most prominent growth managers, James D. McCall and Paul G. Meeks, have recently been replaced. At Putnam Investments in Boston, which has several underperforming growth funds, managers have been shuffled, and the process of picking stocks and balancing potential risks and rewards is being overhauled.

But some fund companies are sticking by their gunslingers. Consider the Invesco Growth fund, run by the Invesco Funds Group in Denver, which was popular with growth fund investors during the boom. The 2001 performance of Invesco Growth was so poor that even its long-term record turned dismal. On Morningstar's five-star rating scale, it now rates just one star, down from three a year ago and five just two years ago.

By increasing its stake in the technology sector early last year, Invesco Growth's managers compounded their troubles. The fund lost 49.1 percent of its value last year -- more than double the loss for its peer group -- and its assets dipped below $1 billion, about half of what they once were.

At the end of November, according to Lipper, another fund-tracking company, only three large-cap growth funds had bigger one-year losses than Invesco Growth, only five had worse three-year records and only 14 had worse five-year records. Taking into account the taxes its shareholders have had to pay on past gains, the fund's average annual return over the last five years has been a loss of almost 6 percent, according to Morningstar.

Through the good and the bad, Trent E. May has managed the fund. He and Molly Cisneros, a spokeswoman for Invesco, said they did not expect that to change.

''Our process, I think, is not broken,'' Ms. Cisneros said. ''Our style works well, and investors like it. We are not going to abandon that style.''

Mr. May, who is also the lead manager of the Invesco Endeavor fund and helps manage the Invesco Growth and Income fund, said Invesco Growth's long-term record painted too bleak a picture. (All three of Mr. May's funds fell more than 43 percent in 2001.)

''It's been a very disappointing year,'' he said in an interview from his home in Colorado. ''I don't want to underemphasize how disappointing it's been.''

But under his management, he said, the fund had performed well through early December 2000. At that point, it was on its way to a sixth consecutive annual gain, he said. But an end-of-the-year swoon sank its return for that year to a loss of 23.9 percent.

In the first quarter of 2001, it lost an additional 40 percent of its value. After rebounding 11 percent in the second quarter, it sank 43 percent in the third.

The wild ride did not end there. As Ms. Cisneros was quick to point out, Invesco Growth had one of the biggest gains of all funds in October and November.

Still, the fund gained about 40 percent in each of its best years, 1997 and 1998. It would have to match that performance in the next two years to make up for last year's loss.

To do that, Mr. May would need a lasting resurgence in the technology stocks that account for more than half of the fund's assets. Despite having dug the fund into a deep hole with an even bigger bet on tech stocks early last year, Mr. May has not looked elsewhere for growth.

HE acknowledged that he and his co-manager, Douglas J. McEldowney, miscalculated in February and March. Thinking that the interest rate cuts by the Federal Reserve would spur a quick economic recovery that would benefit technology companies, they raised the fund's stake in tech stocks to as much as 60 percent.

''We underestimated how much downside there was left in technology,'' Mr. May said. He and his management team, he added, ''didn't cut the numbers enough.''